Question

The process of setting accounting standards has been characterized as a political process. Evaluate this process, citing an example.

Answer 1

There are several groups that influence the standard setting process. The standard setting process is a political process that is affected by the impact of several lobbying groups.

The government, through the Securities and Exchange Commission (SEC), influences accounting standards. The SEC has the authority to issue accounting standards but has assigned this responsibility to the private sector.

Nonetheless, the SEC can exert pressure on the Financial Accounting Standards Board (FASB) to issue accounting standards and veto the standards promulgated by the FASB.

Auditing firms, the corporate sector, creditors, financial analysts, the financial community, accounting organizations, industry groups and investors can influence the FASB by written comments about Exposure Drafts and participation in public meetings and public roundtables regarding a proposed financial reporting standard.

Some of the reasons for political intervention in Accounting Standard Setting Process:

1. Political dimension of accounting emerging from totality of accounting rules
2. Self-interested parties influencing the standard setting body. i.e. choice from conflicting interests
3. Lobbying preferences based on accounting issues

One example to explain the contrast of Political dimension of accounting emerging from totality of accounting rules: The individuals and groups in a society use accounting techniques to alter and improve their economic conditions. Hence the accounting activities working on capital and income breed economic consequences that have impact on welfare of a society and its members. These accounting rules become politico-economic rules when there is political involvement in their formulation process. But a single or a group of accounting rules cannot be called 'politico economic' because the economic condition of most of the people in a society does not change or Improve by any individual accounting method although that may be quite significant in terms of economic consequences, e.g. purchase method to account for business acquisitions, deferral method to calculate deferred taxes, accrual method to value pension reserves etc.

One example to explain the contrast of problem of choice from conflicting Interests: The UK ASB was established in 1990 with an objective of improvement in accounting standards for the benefit of preparers, auditors and users of accounting information. Nobody claims any disadvantage in fixing such objective. But a room for intervention was created when the UK ASB set out inter alia to "determine what should be incorporated in accounting standards based on research, public consultation and careful deliberation about the usefulness of the resulting information".

One example to explain the contrast of Lobbying preferences, Abekah's (2005) study on development of standards in Canada revealed that the Exposure Draft (ED) on corporate Income taxes had almost treble number of responses from public corporations than from accountants and accounting firms. This ED got the highest overall response. On the other hand the ED on financial statement concepts had very high response from accountants and accounting firms but very poor response from public corporations.